When you’re laying out your budget, housing money is probably a pretty big chunk. But are you setting your housing budget wisely?
Before you sign up for a new lease or mortgage, make sure the monthly payments won’t ruin your financial plans.
Following the 28/36 Rule
As with many financial concepts, there’s a rule to help you figure out a housing budget. According to Julia Kagan of Investopedia, the 28/36 rule can guide you toward calculating how much you should take on in debt and housing costs.
Here’s how it works. You shouldn’t take on more than 28 percent of your gross monthly income in total housing expenses. That’s 28 percent of your total pay before taxes, or of the combined income of you and your partner.
The rule also stipulates that the amount of money you spend on housing combined with what you use to pay down debt or other related fees shouldn’t be more than 36 percent of your gross income.
While some financial rules are more like guidelines, the 28/36 rule is a big part of how lending institutions determine if you get a mortgage or loan.
Kagan states that your credit score is often the primary resource for loan decisions, but your personal ratio speaks to how much more debt you can carry. The higher your credit score, though, the more likely it is that loan officers will allow you to add debt over that 36-percent threshold.
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Location Matters When it Comes to Home Costs
The 28/36 rule is good to keep in mind when looking for a place to call home, but sometimes it just can’t be done.
Devon Thorsby, a real estate agent and writer for U.S. News & World Report’s real estate section, said the average rent for a one-bedroom apartment in the U.S. was $1,183. And many property owners in high-priced markets still have strict earning requirements for applicants.
Taylor Glass-Moore, chief operating officer of Zumper, told Thorsby, “In New York, it’s pretty common that a landlord will require your annual income be 40 times your rent and generally above a 650 credit score. In a market like San Francisco, generally they want your rent to be a third of your income [or less].”
Luckily, in Ohio, rental and home prices are more affordable than the national average. You’ll pay about $740 a month to rent in Dayton, all the way up to a little over $1,000 a month in Cleveland.
Ohio is also a more affordable home-buying market, with the median home selling price at $143,000. Again, that’s much lower than the national median selling price of $234,900.
Still, where you rent or buy matters. Look at factors like the neighborhood, school district, proximity to work and attractions, and amenities when you’re considering where you want to live. Sometimes, opting for a neighborhood that’s just outside your “ideal” location can help you save.
How to Save on Closing Costs
When you’re looking for a place to live, make sure that you don’t take off a bigger financial bite than you can chew. Talk to a financial planner if you have concerns about how much you can truly afford for a secure future.
If you’re in the market to buy a home soon, don’t miss Minster Bank’s home closing cost special. You’ll save up to $500 on the closing cost of your dream home.
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Published by Minster Bank
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